OUTLOOK '12: Europe Q1 solvents demand expected to stay weak

28 December 2011 11:37[Source: ICIS news]

By Mark Victory

LONDON (ICIS)--European solvents suppliers are expecting low demand in the first quarter of 2012 because of weak macroeconomic conditions and the traditional off-peak season in the major construction and automotive sectors.

Nevertheless, players are divided on the 2012 outlook beyond the first quarter, depending on solvent type and end-use sector.

“In 2012 we expect similar demand to this year,” an MEK, IPA and MIBK distributor said.

But most ethyl acetate (etac) and butyl acetate (butac) players are anticipating an increase in demand from the second quarter of 2012, in the hope of a partial resolution to the eurozone debt crisis resulting in a restoration of consumer confidence in the key downstream industrial and automotive coatings sectors.

Predictions beyond the first quarter of 2012 are difficult because of volatile financial conditions.

“For 2012 we’ve no idea, it’s really difficult to call. The only business prediction is that it [prices] can’t go down forever without a downturn in production,” another MEK, IPA and MIBK distributor said.

Demand growth in the majority of industries downstream of the solvents sectors is heavily linked to GDP. Changeable general economic conditions mean that consumption forecasts are subject to revision and are not firm.

“2012 we don’t see, it will depend on the balance between the euro/US dollar and the economy. Really, right now, there is no market,” a solvents trader said in December.

Despite expectations of flat 2012 demand in the MEK, IPA and MIBK markets, sources caution that low inventory levels amongst buyers and sellers could lead to volatility and spikes in prices across 2012.

“A buoyant start could catch everyone flat-footed. Whatever happens, it’s inevitable there will be [price] spikes because of low inventories, it just depends on when – it’ll be a quick turnaround,” a MEK, MIBK and IPA distributor said.

Buyers traditionally lower inventory levels in the fourth quarter to reduce working capital in year-end balance sheets. Nevertheless, inventory reduction in the fourth quarter of 2011 has outstripped traditional levels as players additionally seek to build cash reserves to counterbalance double-dip recession risks, leading to empty pipelines. Some buyers and sellers argue that any production hiccups will cause rapid market tightness and price spikes.

“In 2012 it’ll [IPA] behave a little more like acetone. When acetone goes short, it very quickly – in a day or so – changes prices,” an IPA producer said.

The effect could be even more pronounced for MEK. Although the MEK market is long in the short term, it remains structurally tight.

Damage at Maruzen Petrochemical’s 170,000 tonne/year site in Chiba, Japan (the largest Asian MEK plant), during the 11 March earthquake, caused significant volumes to be shipped from Europe to Asia in the second and third quarters of 2011, but oversupply in China has reduced demand.

The Chiba plant is expected to remain off line until May-June 2012, and European players predict that the European market could tighten in the first half of 2012, when exports resume following the Lunar New Year.

“Systems are empty, when Asia comes back it will get short,” an MEK distributor said.

Market players in the European etac and butac markets are uncertain of an upturn in demand before the second quarter of 2012, when seasonal demand is expected to support prices.

Prices for both products fell back to January 2008 levels towards the end of the year, after having climbed up in the first half of 2011 on supply shortage and high demand.

“Stock levels with customers are historically low, we hope for at least a little bit of improvement. It is so bad, it can only improve,” a distributor added on a less popular but optimistic note on the first quarter.

The slow demand from the downstream coatings industry could lead to stable to soft etac prices in 2012.

Slow demand from the downstream automotive coatings sector – that propped up prices in the first half of 2011 – could contribute to further price erosion in the butac market, especially if there is additional pressure from upstream butanol price decreases.

The glycol ethers market continues to suffer from sluggish export demand from Asia, where the market is struggling with the government’s credit tightening measures.

The resultant increased availability in Europe could undermine 2012 prices unless demand in China picks up after the Lunar New Year.

Some market players remain adamant that demand next year for propylene glycol ethers would be better compared with other solvents.

“This year the demand for the classical solvents and propylene based solvents was higher than for ethylene based solvents,” said a producer that expects this trend to continue into 2012.